RULINGS
A.A.R. No. 391 of 1997
Decided On: 27.08.1998
Appellants: Niko Resources Limited
Vs.
Respondent: Commissioner of Income-tax
Hon’ble Judges:
Suhas C. Sen, J. (Chairman), Subhash C. Jain and Mohini Bhussry, Members
Counsels:
For Appellant/Petitioner/Plaintiff: G.N. Singh and Vijay Dhingra, Advs.
For Respondents/Defendant: None
Subject: Direct Taxation
Acts/Rules/Orders:
Income Tax Act, 1961 – Sections 30 to 43D, 115JA and 293A
RULING
1. Niko Resources Ltd., the applicant herein is a foreign company incorporated in Alberta, Canada. It is engaged in the business of exploration and development of oil and gas fields. The applicant entered into a collaboration agreement with Gujarat State Petrochemical Corporation Ltd. (GSPCL), and thereafter jointly entered into a contract with the Central Government of India, in September, 1994, for exploration and development of oil and gas fields at various places. The project involves, inter alia, drilling, completion and testing of development of oil wells, the drilling and completion of wells for gas or water injection, and laying of gathering lines. The contention of the applicant is that these activities come within the scope of Section 42 of the Income-tax Act. Its total income can only be computed, after taking into consideration the special provisions of Section 42. Therefore, Section 115JA cannot be made applicable to the applicant.
2. The following questions for the opinion of this authority have been raised :
“1. Whether the applicant is entitled to special benefits allowed under specific Section 42 of the Income-tax Act, 1961 (regarding the special provisions for deduction in case of business of prospecting, etc., of mineral oil), before calculating the book profit as per Section 115JA ?
2. Full deduction of the expenditure in respect of the assets purchased and/or used in connection with drilling and exploration of oil
and gas allowable under Section 42 of the Income-tax Act, 1961, is given before working out the book profit as per Section 115JA of the Income-tax Act.
3. Section 42 of the Income-tax Act regarding special provision for deduction in the case of the business for prospecting, etc., for mineral oil will have an overriding effect on Section 115JA of the Income-tax Act, in so far as calculating the book profit of the applicant being a foreign company engaged in exploration and development of oil and gas in India.
4. The provisions of Section 115JA of the Income-tax Act, are not applicable to the applicant-company.”
3. The contention made on behalf of the applicant is that Section 42 contains special provisions for deduction from total income in the cases where the assessee’s business is of prospecting of mineral oil. The section itself defines mineral oil to include petroleum and natural gas. Therefore, these special provisions for deduction cannot be denied to the assessee under any circumstances. It was argued that Section 42 was incorporated in this Act because huge investments had to be made for the business of oil prospecting.
4. Our attention was drawn to Section 293A by which the Central Government has been empowered to make special exemptions in relation to the companies in the business of prospecting for or extraction or production of mineral oil, etc. In fact, several notifications have been issued by the Government in exercise of its power under Section 293A to give relief to the assessees engaged in the business of exploration and extraction of oil. It was argued that the importance of the oil industry was recognised by the Government and these two special provisions were made in view of the high expenditure involved in the business of oil exploration. Section 115JA cannot override these special provisions applicable to the oil industry.
5. We are of the view that this argument is misconceived. Section 115JA in so far as is relevant for the purpose of this case is as under :
“115JA. Deemed income relating to certain companies.–(1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 (hereafter in this section referred to as the relevant previous year) is less than thirty per cent, of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent. of such book profit.
(2) Every assessee, being a company, shall, for the purposes of this section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956) :
Provided that while preparing the profit and loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general meeting in accordance with the provisions of Section 210 of the Companies Act, 1956 (1 of 1956) :
Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year.
Explanation.–For the purposes of this section, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under Sub-section (2), as increased by-
(a) the amount of income-tax paid or payable, and the provision therefor ; or
(b) the amounts carried to any reserves by whatever name called; or
(c) the amount or amounts set aside to provisions made for meeting liabilities other than ascertained liabilities ; or
(d) the amount by way of provision for losses of subsidiary companies ; or
(e) the amount or amounts of dividends paid or proposed; or
(f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies ; . . .”
6. The scheme of the income-tax is to levy tax on the total income of an assessee for any assessment year at a prescribed rate. Income has been classified in Chapter IV under various heads. Under each head of income, deductions and allowances have been provided for the purpose of computation of income under that head. In order to compute the total income of the assessee for any particular assessment year, it is necessary to classify and assess income under each appropriate head. If an assessee is engaged in the business of prospecting for or extraction or production of mineral oil, his income will be assessed under the business head. If he fulfils the conditions laid down in that section, he will get the benefit of
Section 42 in the computation of his business income. But this is only a step in the computation of total income. In the process of computation of total income, if any relief has been given to an assessee under any other section that too will have to be allowed. Section 42, however, cannot override Section 115JA which introduces a legal fiction by which thirty per cent. of the book profit of an assessee is deemed to be his total income. Section 115JA does not seek to levy tax on the business income of an assessee, but on his total income.
7. Section 42 which starts with the words “For the purpose of computing the profits or gains of any business consisting of the prospecting for or extraction or production of mineral oils . . .” Section 42 will be applicable only when computation of profit and loss of the business of prospecting for or extraction or production of mineral oil is taken up.
8. Section 293A also does not advance the case of the assessee in any way. The section is as under :
“293A. Power to make exemption, etc., in relation to participation in the business of prospecting for, extraction, etc., of mineral oils.–(1) If the Central Government is satisfied that it is necessary or expedient so to do in the public interest, it may, by notification in the Official Gazette, make an exemption, reduction in rate or other modification in respect of income-tax in favour of any class of persons specified in Sub-section (2) or in regard to the whole or any part of the income of such class of persons or in regard to the status in which such class of persons or the members thereof are to be assessed on their income from the business referred to in Clause (a) of Sub-section (2) :
Provided that the notification for modification in respect of the status may be given effect from an assessment year beginning on or after the 1st day of April, 1993.
(2) The persons referred to in Sub-section (1) are the following,
namely :–
(a) persons with whom the Central Government has entered into agreements for the association or participation of that Government or any person authorised by that Government in any business consisting of the prospecting for or extraction or production of mineral oils ;
(b) persons providing any services or facilities or supplying any ship, aircraft, machinery or plant (whether by way of sale or hire) in connection with any business consisting of the prospecting for or extraction or production of mineral oils carried on by that Government or any person specified by that Government in this behalf by notification in the Official Gazette ; and
(c) employees of the persons referred to in Clause (a) or Clause (b).
(3) Every notification issued under this section shall be laid before each House of Parliament.
Explanation–for the purposes of this section,–
(a) ‘mineral oil’ includes petroleum and natural gas ;
(b) ‘status’ means the category under which the assessee is assessed as ‘individual’, ‘Hindu undivided family’ and so on.”
9. Section 293A has nothing to do with computation of total income. It lays down that the Central Government may by notification grant exemption or reduction in rate of tax or other modifications in respect of income-tax in favour of certain classes of assessees. We were referred to two notifications issued under Section 293A dated March 31, 1983, and July 6, 1987. Both the notifications pertain to rates of tax payable by foreign companies under certain circumstances. We fail to see the relevance of these two notifications for the purpose of the present case. Neither Section 293A nor the two notifications issued thereunder can cut down the scope or effect of Section 115JA which stands on a different footing altogether. It does not contain a machinery for computation of business income or total income of an assessee. It provides a rough and ready formula. A minimum amount of tax will have to be paid by an assessee on the basis of its book profits if its total income is less than thirty per cent of its book profit. In such a situation the assessee’s total income shall be deemed to be thirty per cent. of its book profit. This is a legal fiction. It will come into play only when the total income as computed under this Act is less than thirty per cent. of the book profit of an assessee. Total income has to be computed in the manner laid down in the Act. If an assessee has business income, it will have to be computed in the manner laid down in Sections 30 to 43D. All the deductions and allowances permissible under any other provision will also have to be given to the assessee for the purpose of computation of his total income in regular course of assessment of income. If the total income, thus calculated, falls short of thirty per cent. of book profit, the special provisions of Section 115JA come into operation. There is no scope for any deduction or allowance under any other provision of the Act at this stage. The section is to apply “notwithstanding anything contained in any other provisions of this Act”. Book profit has been defined and explained in Section 115JA. This provision became necessary because a large number of companies were not paying any tax in spite of making huge profits by taking advantage of the various provisions for deduction and allowances contained in the Act. The total income thus computed was way below the taxable limit. To circumvent this, Section 115JA was introduced in the statute. Thirty per cent. of the book profit of a company will have to be treated as its total income in a case where the total income as computed in
accordance with the other provisions of the Act was found to be less than thirty per cent. of the book profit of the company. What is book profit has been defined and explained in that section. Section 115JA is a self-contained code and will apply notwithstanding any other provisions of the Act. There is no scope for any allowances or deduction under any other section from what is deemed to be total income of an assessee.
10. The questions raised by the applicant which we have set out earlier are not happily framed. We answer all the questions by saying that the applicant cannot claim any special benefit under Section 42 in the calculation of its book profit by resorting to Section 115JA. Deduction of expenditure under Section 42 is allowable only when business income is computed under Chapter IV-D of the Income-tax Act. Section 42 of the Income-tax Act cannot override the provisions of Section 115JA. The provisions of Section 115JA will clearly apply in the case of the applicant-company.
11. The application is disposed of finally as above.